Chapter2Inventory

Management

andRiskPooling

2.1Introduction

WhyIsInventoryImportant?Distributionandinventory(logistics)costsarequitesubstantialTotalU.S.ManufacturingInventories($m):1992-01-31:$m808,7731996-08-31:$m1,000,7742006-05-31:$m1,324,108Inventory-SalesRatio(U.S.Manufacturers):1992-01-01:1.562006-05-01:1.25

GM’sproductionanddistributionnetwork20,000supplierplants133partsplants31assemblyplants11,000dealersFreighttransportationcosts:$4.1billion(60%formaterialshipments)GMinventoryvaluedat$7.4billion(70%WIP;RestFinishedVehicles)Decisiontooltoreduce:combinedcorporatecostofinventoryandtransportation.26%annualcostreductionbyadjusting:Shipmentsizes(inventorypolicy)Routes(transportationstrategy)WhyIsInventoryImportant?

WhyIsInventoryRequired?UncertaintyincustomerdemandShorterproductlifecyclesMorecompetingproductsUncertaintyinsuppliesQuality/Quantity/Costs/DeliveryTimesDeliveryleadtimesIncentivesforlargershipments

Holdingtherightamountattherighttimeisdifficult!DellComputer’swassharplyoffinitsforecastofdemand,resultingininventorywrite-downs1993stockplungeLizClaiborne’shigher-than-anticipatedexcessinventories1993unexpectedearningsdecline,IBM’sineffectiveinventorymanagement1994shortagesintheThinkPadlineCisco’sdecliningsales2001$2.25Bexcessinventorycharge

InventoryManagement-DemandForecastsUncertaindemandmakesdemandforecastcriticalforinventoryrelateddecisions:Whattoorder?Whentoorder?Howmuchistheoptimalorderquantity?ApproachincludesasetoftechniquesINVENTORYPOLICY!!

SupplyChainFactorsinInventoryPolicyEstimationofcustomerdemandReplenishmentleadtimeThenumberofdifferentproductsbeingconsideredThelengthoftheplanninghorizonCostsOrdercost:ProductcostTransportationcostInventoryholdingcost,orinventorycarryingcost:Statetaxes,propertytaxes,andinsuranceoninventories